Several aviation, hospitality and telecom companies are facing the dual burden of paying Goods and Services Tax (GST) dues in cash even as input tax credits keep piling up, stretching the working capital cycle at these companies and creating cash-flow problems.
As per the GST framework, the burden of tax payments on certain services and raw materials used in the input or making of the product is one the buyer. This GST cost is then set off and passed on to consumers when they buy these services.
However, the GST on input services and raw material has to be paid first. This reverse charge liability has to be paid in cash.
Due to the Covid-19 pandemic, companies facing revenue hit can’t pass on this GST cost to consumers. Even so, they have to pay the tax on raw materials and input services in cash, say industry trackers.
Abhishek Jain, Tax Partner, EY said,
“An embargo on the utilisation of input tax credit for payment of reverse charge liabilities has been a matter of financial stress perpetually for businesses.
With the current pandemic, this concern has only worsened and businesses have been strenuously representing to the government for some relief on this aspect – specifically businesses with fixed committed costs involving a reverse-charge levy.”
For instance, in airlines companies, their input credit keeps getting accumulated on account of GST payment on fixed charges such as airport usage, lease rentals for aircraft, etc.
Although they have input credit, they have to pay GST in cash on a reverse charge basis (RCM) on the lease rentals they pay to foreign aircraft lessors.
This results in increasing cash payout at the expense of credit accumulation.
Such industries have been seeking relief from the government to allow RCM payments through accumulated input tax credit.
“The government could come out with a solution for specific sectors such as aviation and hospitality that have a large pool of credits lying but still have to pay reverse charge in cash. The government could extend this option for specific output services that could discharge liability under the reverse charge through the accumulated credit lying on the books for a specific period,” said Abhishek A Rastogi, partner at Khaitan & Co.
In a few cases where the RCM applies, the recipient of the supply is liable to pay tax instead of the supplier in normal cases.
For example, telecom players have to pay the RCM on government charges for spectrum, airlines have to pay reverse charge liabilities on payment to foreign parties for lease of aircrafts, and multinationals have to pay tax on royalty for brand, technical knowhow, IT, management and other cross charges.
(With the inputs of – ET Travel)